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Risks for property developers when building near a railway

Development land in cities is at a premium, and, increasingly, construction is taking place near railway tracks and infrastructure.

Development is being encouraged by infrastructure owners, and there will be no shortage of developers bidding for these projects.

Transport for London (TfL), for example, has appointed a panel of property development partners for projects around London; planning applications have been submitted for developments at Nine Elms, Northwood and Parsons Green. However, developers should tread carefully when negotiating the contract terms and the indemnities they agree to take on.

Construction near transport infrastructure involves significant liabilities that might not be covered by standard insurance policies. At the heart of the issue are asset protection agreements, a standard element of contracts between developers and infrastructure owners.

Understandably, bodies such as Network Rail don’t want infrastructure to be interrupted by building work.

If the infrastructure is unavailable, for whatever reason, they have to pay damages to the relevant train operating companies. And these damages can add up to more than GBP 5 million a day for busier routes.

As a consequence, rail infrastructure owners require developers to sign up to onerous agreements to indemnify them for network disruption. Critically, these agreements make the developer liable to a greater extent than they would be under common law.

As always, risk management is a better option than relying on insurance; coverage is difficult – and expensive – to obtain. This could leave developers facing huge uninsured liabilities, should an interruption occur to the business.

Why are insurers wary of covering these risks?

Firstly, insurers are reluctant to take on risks over and above normal common law liability. It’s a complicated area, but you are normally only liable in common law for losses arising from physical damage or injury. As a result, insurers look to exclude liabilities arising from agreements which are more onerous, as is our experience in these cases.

It’s not uncommon for sites to be shut down by fires, or an alternate safety related event. Every time a rail-side site is shut down, developers may be held liable for non-damage related closures and also for reparations to the rail operator.

Secondly, there can be a lack of clarity as to the extent of the liabilities within the agreements between the infrastructure owner and the train operator.

There is a case to be made that greater transparency would lead to a better understanding of risk from both a developers and insurers’ point of view. However, for now, obtaining specific data from transport organisations is difficult.

So how can developers find a safe path through the minefield?

Developers can reduce their exposure significantly by seeking advice from a specialist broker. They should talk to one that has rail experts who can negotiate bespoke insurance solutions with infrastructure risk managers.

For example, JLT has developed solutions that cover contractual financial liabilities. Developers should ensure that their broker has the depth of rail expertise to negotiate solutions that will be required on top of standard liability policies

This blog is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property.

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Jardine Lloyd Thompson Group plc, incorporated and registered in England and Wales. Registered Office at The St Botolph Building, 138 Houndsditch, London, EC3A 7AW. Registered number 1679424. Jardine Lloyd Thompson Group plc is a holding company, some of whose subsidiaries are authorised and regulated by the Financial Conduct Authority.